Price Floors and Price Ceilings

Kristen Fowler Economics April 16, 2012 n  Price Controls: How efficient are price ceilings and price floors? If you think one is better than the other, make sure to bring up examples from our economy to validate your stand. Price ceilings and price floors are essential aspects of our economy. Price ceilings are government enacted laws preventing suppliers from establishing prices of key resources higher than a certain price, which is set by the government. Price floors are price minimums that can be charged for a good or service.

These price controls are put in place in order to maintain an affordable lifestyle and protect consumers from suffering form unfair inflation. However, when not executed properly, price controls can become ineffective. Price ceilings are enacted in order to benefit consumers. Price ceilings prevent businesses from charging unfair prices. For example, if only one seller has access to a certain product that is a necessity to consumers, without a price ceiling they have the ability to charge an outrageous price. Price ceilings also assist in keeping the cost of living reasonable in the case of high inflation.

If prices rise faster than incomes do, people will be unable to maintain a comfortable standard of living. However, when enacted out improperly price ceilings can have a negative outcome. It is important that price ceilings are set above the market price. If a price ceiling is set below the market price, it will result in a shortage. An example of misuse of price ceilings is when a price ceiling is established on a product in which the price is thought to be too high; however a more efficient means of solving this problem would be to increase production.

An ineffective price ceiling is one that is set above the market equilibrium price. The product is already selling for much lower than the price ceiling, so unless the price greatly increases, the price ceiling serves no vital purpose. Price floors are a government imposed limit of how low a price can be for a good or service. I do not believe that there should be a price floor set on products or services, and that the law of supply and demand should determine the pricing of products. However, a necessary price floor our government has in place is minimum wage.

Minimum wage is essential because if employers were able to pay employees as little as they want, workers may not be able to afford the cost of living. Although minimum wage is beneficial to the people, it is also beneficial to the government as well. By setting a minimum wage, the need for public assistance decreases. Setting a minimum wage also encourages consumption. If people just have enough money to pay for their basic needs, they will not have money to spend and put back into the economy.

The effectiveness of price floors greatly depends on where it is set in respect to the market equilibrium price. If the price floor is set underneath the market equilibrium price, it has no effect since the consumer is already paying a higher price. This price floor will not be effective unless the market price decreases. A price floor will make a direct impact on the market if it is set above the market equilibrium price. By setting a higher price floor, you are ensuring that more products can be made, however there are negative results as well.

Consumers will recognize that they are now paying a higher price for the same product, which may lead to less consumption, directly leading to a surplus. This idea holds true in the example of minimum wage as well. If the minimum wage rate is set too high, more unskilled workers will enter the labor force, and less employers will be willing to pay this rate leading to less hiring. Therefore setting the minimum wage rate too high will directly lead to increased unemployment. http://smallbusiness. chron. com/advantages-disadvantages-price-ceiling-25210. html